Managing Inventory: From Fat to Lean

As more businesses source from offshore manufacturers and suppliers, having visibility and control over moving inventory requires both a tactical and strategic lean approach.

Automobile pioneer Henry Ford's vision of "just-in-time" (JIT) logistics and lean manufacturing and their importance in his assembly-line production chain was remarkable because he recognized the broader challenges of sourcing and sequencing raw materials and parts and properly matching supply to demand. The ability to control the process within his facilities was vital to Ford's success.

"The easiest of all wastes, and the hardest to correct, is this waste of time because it does not litter the floor like wasted material," he wrote in his 1926 book, Today and Tomorrow.

In the 1980s, Japanese automobile manufacturers took Ford's Tomorrow vision one step further with their philosophy of Kaizen, or continuous improvement. Manufacturers such as Toyota embraced the importance of creating a skilled, team-oriented labor force that could apply one process to myriad projects. They also looked to build synergies outside their four walls with suppliers and supply chain partners.

The process morphed into an ideology that pervaded the entire supply chain continuum—from consumer to manufacturer to supplier.

"According to Toyota, lean was a philosophy and continuous improvement process that minimized technology," says Steve Banker, service director, supply chain management, for Dedham, Mass.-based ARC Advisory Group. "Historically, from a procurement perspective, when a business went lean it asked key suppliers to build factories close by. The Japanese automakers did this too.

"Businesses wanted vendors that could feed their facilities reliably, so they reduced the number of suppliers they did business with. And it worked," he says.

For Toyota, and even Ford Motor Company during its halcyon years, this dynamic was simplified because most of their raw material suppliers were regionally located and easily accessible.

Fast forward 20 years and the rules of engagement for global manufacturers and distributors are considerably different.

Globalization has had a marked impact on how enterprises embrace, fine-tune, and grapple with the nuances of just-in-time logistics and lean processes. The advantages remain the same: cheaper inventory carrying costs, better labor utilization, more efficient use of transportation, and enhanced customer service.

The complexity and breadth of global supply chains, however, have grown considerably with the evolution of web-based communication capabilities and transportation innovation.

Manufacturers and retailers now source components and products from multiple global locations, and the challenges of making sure offshore suppliers and manufacturers can reliably ship product to meet the demands of the marketplace have increased significantly.

Having visibility and control over moving supply rather than idle inventory has compelled businesses to take both a tactical and strategic approach to developing lean supply chains.

"It has been cyclical though the years. Globalization, economic recessions, and major disasters such as Sept. 11 have pushed the envelope in favor of lean."

Paradoxically, these very circumstances also threaten the efficacy of JIT logistics and lean manufacturing processes. Some industry observers have gone so far as to suggest that JIT is no longer practical given global supply chains' volatility and variability.

Instead, they argue, businesses should embrace lead times and stockpile "just-in-case" inventory to ensure that their supply lines remain fluid when delays occur.

Clearly, enterprises are more conscious of the risks associated with global sourcing. The push for lean logistics processes has engendered a greater awareness of contingency planning and risk management.

Lean logistics and risk management are intrinsically linked, but their prescriptions conflict entirely. Where a lean approach attempts to streamline and mitigate lead times and excess inventories, "risk management entails figuring out what sort of buffers can be put in place to eliminate disruptions," Banker says.

Businesses look at inventory with two things in mind: cycle stock to fulfill day-to-day needs, and safety stock to cover any source of variation in the supply chain, says Kiron Shastry, associate partner in Accenture's supply chain management line.

"The amount of safety stock an enterprise allows for similarly depends on two factors: how accurate the company is in forecasting demand, and how well its suppliers meet inventory needs," explains Shastry.

Businesses inherently build buffers into the supply chain because of inevitable variations in speed and reliability. These buffers primarily manifest themselves as inventory and lead times.

"A supply chain is a system of interdependent processes with its own unique characteristics—capacity, responsiveness, and reliability. The goal of supply chain management is to integrate these processes as effectively as possible to attain a certain level of service while reducing inventories and lead times," says Banker.

The value of lean concepts is still critical to a supply chain's overall fluidity. It requires a more integrated approach, however, than simply enhancing visibility within a warehouse and reducing inventory. Companies must extend lean concepts outside the four walls to develop more effective and more reliable synergies with supply chain partners.

Pulling Demand

When enterprises go lean they generally reduce the number of suppliers they source from. But depending on a core number of suppliers limits a business' flexibility and responsiveness to supply chain disruptions.

"When companies transition to lean, they are more susceptible to changes among their suppliers, and more sensitive to fluctuations in their supply lines," says Adam Sommers, a partner with Tefen, an operations management consulting firm headquartered in New York, N.Y.

Because businesses today align themselves with partners all over the world, fostering collaborative relationships is critical.

"Supply chain synchronization at its core is about looking at inventory and lead time buffers and developing relationships with trading partners to enhance visibility and processes, both internally and across the trading partner network," says Banker.

Adequate communication traditionally exists between manufacturers and suppliers, given their obvious symbiosis. But similar reciprocity needs to occur between consignees and transportation service providers.

"When companies source globally, lead-time variability becomes a determining factor," says Shastry. "If an inbound carrier does not have visibility, for example, that is a major problem."

Controlling the inbound flow of product therefore becomes a critical step in creating a leaner pipeline on the supply side. Knowing where product is and when it will arrive gives stateside consignees a built-in buffer that allows them to manage exceptions, reroute shipments, or source from alternate suppliers if the need arises.

The demand-driven "pull" model works particularly well for high-volume and predictable shipments because consignees can efficiently gauge and control the flow of product from suppliers through the supply chain. The JIT approach, however, is not always appropriate. It can be a liability depending on the characteristics of the product being shipped and market demand.

Where demand is variable and product is less uniform or moving in smaller volumes, it is difficult to control the flow with a pull model. Businesses with these types of products—oftentimes manufacturers—require a more synchronized approach that can flex with fluctuations in the supply line and add buffers when the need arises.

Even on the retail distribution side, in some circumstances, streamlining inventory too much can cause problems. "When you are in a service-oriented industry you can hurt yourself by going too lean," says Shastry.

If, in thinning out inventory, a business cannot properly replenish store stock in a timely manner, any reduction in warehousing costs is ultimately negated by a loss of sale.

Different Implications

Ultimately, manufacturers and retailers each bring their own unique demands to the market. Distributors require robust flexibility and warehousing capabilities; manufacturers are more concerned with optimizing sequencing of scheduling for individual supply lines. Within this context, "lean" and "just-in-time" have different implications.

"Distributors want to make deliveries on time; manufacturers want to make products on time, using minimal inventory, time, and resources," says Duket. "Lean at its very core is not 'just-in-time.' Lean means getting more done with what you have."

Companies often perceive lean or JIT concepts as panaceas for every business challenge, agrees Banker.

"The reality is not every industry can go all the way to lean. Businesses that have the most success with lean—Dell, for example—have a direct sales model," Banker explains. "Lean works well within this paradigm. It works great for more complicated supply chains that are made to order. But it is not the solution for every company."

Supply chain synchronization and a pull approach often go hand in hand. Businesses that have a varied mix of product with different characteristics may apply a hybrid approach, using a pull model for some inventory, then a more flexible lean engine for others.

The key to creating a truly lean and reliable supply chain network is not about carrying the least possible amount of inventory; but rather having the flexibility and control to scale supply to changing demands.

Having visibility and control of inventory—whether in the warehouse or in transit from a supplier—is critical to reducing lead times and dependence on surplus.

When York International, the largest independent supplier of heating, ventilating, air-conditioning, and refrigeration equipment in the United States, revamped a manufacturing facility in Albany, Mo., its goal was to create a lean operation with more control over inventory in the warehouse.

"We were having inventory problems at that facility: we didn't know when material was arriving, whether it was on the dock, in the warehouse, or on the shop floor," says Kim Kimball, manufacturing system support team consultant for the York, Pa.-based manufacturer. "We decided to convert the facility into a controlled warehouse where every item would have a unique location within the system."

To facilitate the transition, York elected to integrate Eden Prairie, Minn.-based HighJump Software's Data Collection Advantage (DCA) solution as an add-on to its existing MAPICS Enterprise Resource Planning (ERP) system.

Before installing DCA, York could calculate how much inventory it was carrying but could not locate where that supply was in the warehouse or on the shop floor. York was receiving shipment information and purchase orders against sheets of paper, then manually entering the receipt transactions into MAPICS. Warehouse personnel had poor visibility into where and when stock was moving through the facility.

"Communication and information sharing between shifts within the warehouse was fractured," says Kimball. "In the past, if we knew we had 10 parts in stock but we could only locate five, we might go ahead and replenish that inventory. We wasted a lot of time looking for those misplaced parts, which ultimately led to surplus inventory."

In coordination with the MAPICS ERP system, HighJump's DCA solution empowers York's warehouse personnel with quicker and more accurate inventory information. It generates reports linking labor utilization with production statistics and helps track stock through production and inventory processes.

Already, York has reaped significant benefits through better visibility and inventory control in its warehouse.

"We have cut down on the time it takes to locate items," says Kimball. "Our new system gives us more control of information when we receive product, as well as better accuracy on inventory when we do cycle counts or request product from the floor. As soon as a product hits the receiving dock, we can tell the dock instantly that the shipment is for an order and that it's going down a line that is short so we can even bypass delivery to the warehouse."

Implementing Kanban

In addition to transforming the warehouse into a controlled operation, York is in the process of implementing an e-Kanban system, a process that utilizes cards and boxes/containers to pull parts from one workstation to another on a production line.

"Before, if we were missing or short parts on the line, an employee would leave the line and go to the warehouse with a list of missing parts. Then, a warehouse worker would hunt around and find the parts," says Kimball.

"By contrast, the Kanban system provides bins and cards for parts. Every morning a person goes down each line with a handheld bar-code scanner, scans any empty bins, automatically communicates this information and location to the warehouse, and tells it which bins are empty and where they are located. Then they fill the bins and take product directly to the line," he explains.

This avoids the delay of someone leaving the line to communicate inventory needs to the warehouse. As a result, York has better visibility of its inventory, and knows when it needs to replenish.

When York fine-tunes its Kanban system, it will have a program that automatically reorders products directly from the warehouse to the supplier.

"As soon as an item is pulled from the warehouse, delivered to the shop floor, and hits a certain level, the program will spin data and—immediately, without intervention from warehouse personnel—automatically cut a purchase order and e-mail both the vendor and the buyer with a quantity for the next shipment," says Kimball.

York's strategic approach to leaning its warehouse gives it greater leverage in rolling out similar plans at other facilities. Increasingly, businesses are making the transition to lean by initiating projects at specific sites, as York did, then gradually building support throughout the enterprise and ultimately the extended value chain.

"When it comes to making a change to lean, businesses often use a powerful pilot project to champion a broader full-enterprise rollout," says Sommers. "It's a matter of evolution rather than revolution."

One packaging company, for example, went to one of its larger manufacturing facilities undergoing a major renovation, and was able to cut conversion costs almost 25 percent by simply implementing lean processes, reports Sommers. The company then decided to apply that success to a few of its other facilities, rotate expertise from one site to another, and ultimately create a farm system for lean innovation.

When businesses approach transition this way, they can extend lean concepts beyond the four walls of their enterprise, suggests Sommers.

"They can begin asking more strategic questions, such as: Where is our customer base? What are our ordering patterns? How can we better build our supply chain system to meet market demands?" he says.

Finding a Process that Sticks

Such was the case when Poli-Film, a polyethylene adhesive manufacturer, decided it needed a major overhaul after more than three years of hemorrhaging profits because of a flawed management system.

"It was mayhem," admits Geoff Davis, president, Poli-Film. "To support a change in philosophy within our enterprise we had to bring in a new system."

Poli-Film makes a line of polyethylene protective adhesive film products designed to prevent abrasion, scratching, or staining of exposed surfaces during manufacturing, finishing, assembly, and delivery cycles. It operates a manufacturing plant in Hampshire, Ill., and a distribution facility in Atlanta, Ga.

Poli-Film was using a software system that could not accurately process information and required manual input and intervention throughout the entire manufacturing process. Data inaccuracy, slow production, and inconsistencies in final products created major bleeds to the bottom line.

"Our inventory control was hit-or- miss because we were essentially manually counting inventory. Capturing raw material information was inaccurate and laborious. We were unable to link together our distribution facilities with our manufacturing plant, so we had limited control of product movement," adds Davis.

The manufacturer decided to jettison its outdated system and implement Infor's VISUAL Enterprise discrete manufacturing solution to enhance speed and accuracy of processing information and ultimately improve its production flow.

"Poli-Film required a synchronized approach where it could look at its overall projected demands. It needed a sophisticated engine that could spin information and maximize utilization of resources while minimizing inventory—essentially taking a holistic look at the production chain with marginal pull effect," says Duket.

Integrating the solution into its enterprise enabled Poli-Film to synchronize material handling and shop floor scheduling in real time, which was critical given the fluctuating demands of its customers, says Davis.

"As the market ebbs and flows, we need to be flexible and change the types of raw materials we source to match our customers' needs. Infor's system allows us to get closer to the customer and be more flexible in sourcing material from vendors as well," he adds.

The information exchange between Poli-Film's manufacturing facility and its Atlanta DC is seamless, so it sees consumer demand up front and in real time. "An order goes straight through to manufacturing, and doesn't get confused with external customers or other stops along the way," says Davis.

"Now we get a semi-finished specification from our Atlanta DC through its inter-branch transfer system, and that goes straight through to our production office.

"If a customer places an order in Atlanta for adhesive sheets 48 inches wide by 3,000 feet long, for example, we produce an uncut sheet 102 inches wide by 3,000 feet and our DC takes out the necessary width. So we have a semi-finished product straight off the counter that hasn't been made to a finished specification. Our Atlanta facility then gets the final finished specs from a regional customer and cuts the final product," he adds.

The ultimate advantage, says Mooney, "is that we can react faster to our Atlanta facility's needs, and ultimately to our end customer."

Before implementing Infor's VISUAL Enterprise solution, Poli-Film was wrong 50 percent of the time when it tried to anticipate demand, says Davis.

"As a result, our inventory-to-sales ratio was significantly higher. Now we can control the right inventory at the right time," he explains.

Poli-Film's ability to reduce inventory and grow at the same time is perhaps the greatest indication of how far it has come in the two years following its lean transformation. "Since 2003, we have reduced our raw film inventory on the floor by 30 percent," says Mooney.

"But what is more remarkable," adds Davis, "is that during the same period we have grown more than 50 percent."

Successfully building a lean enterprise, as both York International and Poli-Film can attest, is ultimately about getting better control of inventory. Once this is accomplished, businesses can communicate necessary information throughout the supply chain and better match supply to customer demand. Truly lean enterprises will create their own buffers simply by having the agility to act quickly to change.

While technology has become a key enabler that gives enterprises leverage to facilitate this communication and information exchange, lean concepts are ultimately process-driven. It's about controlling the process within the warehouse and eliminating physical and temporal waste, just as Henry Ford envisioned a century ago.

But as a concept, it is also about extending that strategic vision not only to employees but also to transportation service providers, intermediaries, and suppliers in much the same way Toyota did with its Kaizen approach.

"Lean logistics is not a silver-bullet solution; it is a journey," says Banker. "It's partly about people, and partly about continuous improvement. Technology helps, but processes drive it."

The Quickturn Crossdock

For many consumer goods manufacturers and retailers moving high-volume shipments within a predictable supply chain, the ability to replenish stock quickly and efficiently at a moment's notice is vital to capturing and keeping consumer business. The crossdock is one tactical approach that is increasingly relevant in these lean enterprises.

"Businesses are moving away from warehousing inventory to crossdocking and holding very little stock," says Steve Banker, service director, supply chain management for Dedham, Mass.-based ARC Advisory Group. "The crossdock has not historically been associated with lean but it is absolutely a lean principle.

"It works best when you are the 800-pound gorilla. Crossdocking is much harder for manufacturers to practice than it is for retailers," he says.

For Hudd Distribution, the crossdock facility is central to its core expertise as a customized distribution solutions provider for major retail arms such as Heineken, Wal-Mart, and Target, among others.

The ability to quickly and efficiently break and sort shipments without warehousing inventory adds lean value to its supply chain.

Crossdocking, as opposed to a storage model, provides three savings, says James Ridgely, general manager at Hudd Distribution's Chesapeake, Va., facility.

"We save time by not moving product to storage, and we cut costs by not having to pay for a storage facility, and by increasing inventory turnover," Ridgely says.

"In a crossdock environment, the flow of inventory has an increased velocity through the supply chain as it never moves to a 'storage' location. It is always moving toward the ultimate goal of being placed on a store shelf."